Dismal Economic Data May Force Fed to Act

New claims for U.S. jobless aid unexpectedly rose last week and factory activity along much of the Eastern seaboard contracted early this month, backing the view the Federal Reserve would move soon to boost growth.

However, industrial production edged higher in August and consumer prices rose more than expected, factors that could give U.S. central bankers some pause over putting in place aggressive new measures to help the economy.

Still smarting from the 2007-2009 recession, the U.S. economy barely grew in the first half of this year and a bruising spending battle in Congress spooked consumers into shutting their wallets last month. With growth limping along, the economy also looks very vulnerable to an escalation in Europe's debt crisis.

"Business activity has slowed and confidence has fallen ... but we haven't slipped into a recession yet," said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York. "The Fed can still do some additional easing."

The number of Americans filing new claims for state unemployment aid rose unexpectedly to 428,000 in the week ended Sept. 10, the Labor Department said on Thursday.

It was the second straight weekly increase and took initial claims to their highest level since the week ended June 25. Wall Street analysts expected a modest dip.

Despite the data, U.S. stocks rose and debt prices fell after a plan was offered by global central banks to reintroduce dollar liquidity into the strained European banking system.

Peter Kenny, managing director of Knight Capital in Jersey City, New Jersey, said much of the data was bad but not "apocalyptic," and other analysts agreed.

The Philadelphia Federal Reserve Bank said its business activity index registered minus 17.5 in September, an improvement from August but still pointing to contraction for the second straight month.

The New York Federal Reserve Bank said its manufacturing index for New York state fell to minus 8.82 in September -- its lowest level since November. It was the fourth straight month pointing to contraction.

FED TO THE RESCUE

The data could provide an added sense of urgency for Fed Chairman Ben Bernanke and his colleagues, who plan to take an extra day at their policy review next week to deliberate their options. Many economists expect the central bank to unveil new measures to lift growth when the meeting concludes on Wednesday.

Despite dim prospects of the nation's 9.1 percent unemployment rate coming down much any time soon, many Fed watchers expect a relatively modest step to try to bring down long-term interest rates without ramping up dollar printing.

The unexpectedly stiff reading on inflation could provide fodder for a lively central bank debate.

The Labor Department said in a separate report that its Consumer Price Index increased 0.4 percent last month after rising 0.5 percent in July. The reading was higher than analysts' forecasts, with food prices posting their biggest gain since March.

"It will make it more difficult for the Fed to talk about lower rates, even if the economy needs it," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

Analysts now put the odds of a new U.S. recession at nearly one-in-three after recent reports showed no employment growth in August and a plunge in consumer confidence. Consumer spending ground to a halt in August as well.

The core price index — which excludes food and energy — rose 0.2 percent last month, in line with expectations and the same as in July. Both the headline and core year-on-year readings moved higher.

In its report on output at the nation's mines, factories and utilities, the Fed said manufacturing production rose 0.5 percent last month as auto production picked up. Utilities' output fell a sharp 3 percent as August was cooler following a bout of unusually hot weather in July. Mining output increased 1.2 percent.

New claims for U.S. jobless aid unexpectedly rose last week and factory activity along much of the Eastern seaboard contracted early this month, backing the view the Federal Reserve would move soon to boost growth.
However, industrial production edged higher in August and...